ECON 104 Lecture Notes - Lecture 10: Lorenz Curve, Progressive Tax, Externality

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goldalpaca76

13 Aug 2016

School

Simon Fraser University

Department

Economics

Course

ECON 104

Professor

Vasyl Golovetskyy

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Document Summary

Think about many inequalities such as income(distribution of all the monetary and some non-monetary receivables), pay(distribution of wages), and wealth(the present value of the future incomes plus the net assets you own) Pay inequality estimated on individuals basis, when income or wealth inequality is estimated, it is often done on the individual basis but also often on family or household basis. Ratio measures= 1% (income of 1%/income of everybody)= 1/100 ex 10% top/10%bottom or 10% top/20%bottom. Take all the people and sort them from lowest to highest earners (income) Then record cumulative income( the person"s income and everybody who makes less than this person) A lorenz curve plots the cumulative percentages of total income received against the cumulative number of recipients, starting with the poorest individual or household. The most common way to reduce inequality is through the progressive taxation. Redistribution because people are altruistic ex donate to charities. It seems to be a problem (rawls) veil of ignorance.

Related Questions

Person	Judy	Sandy	Dee	Shawntae	Martha
Income	$40,000	$75,000	$85,000	$35,000	$110,000

The above table lists the incomes for the 5 people who live on the remote island nation of Richland.

1. Refer to Table 21.1. If Martha's income doubled to $220,000 while the incomes of the other four residents did not change, what would happen to the original median income onâ Richlandia?

A.It would increase by $22,000.

B.It would increase by $44,000.

C.It would not change.

D.It would double.

2.When we compare shares of income earned by U.S. households over the past 40 years, which of the following statements about the distribution of income isâ true?

A.The percentage of total income represented by each quintile has decreased.

B.Lower income households gained at the expense of higher-income households.

C.The largest gain in income percentage is in the top 5% of households.

D.The percentage of total income represented by each quintile has increased.

3.From 1970 to 2012, the Gini coefficient in the United States has

A.dramatically decreased.

B.remained is relatively unchanged.

C.steadily increased.

D.more than doubled.

4.Income distribution in the United States over the past 40 years has become more equal.

True

False

5.Income inequality in the United States has increased in part due to technological change. How does technological change contribute to incomeâ inequality?

A.It is responsible for a majority of new products on the market, and these products are only affordable to higher-income households.

B.It reduces the cost of producing goods and therefore lowers the value of labor services.

C.It allows manufacturers to produce products with lessâ labor, and this reduction in the demand for labor lowers wages at all skill levels.

D.It has created many higher-income jobs for skilled and trainedâ workers, leaving the income of less-skilled workers relatively unchanged by comparison.

6.Income inequality in the United States has increased in part due to globalization. How does globalization contribute to incomeâinequality?

A.It allows domestic firms to hire low skilled workers anywhere in the world, putting U.S. workers in competition with foreign workers. This has caused the wages of low skilled workers to fall relative to the wages of other workers.

B.It increases the demand for a wide variety of products which in turn increases prices beyond the reach of average income

households.

C.It allows producers to exploit workers and reduce the wages they are willing to pay those workers.

D.It reduces the cost of producing goods and therefore lowers the value of labor services.

7.Rachel, a large pineapple producer in Hawaii, lobbies Congress to limit imports of pineapples to be able to sell her pineapples at a higher price and greatly increase her income. This possible source of income inequality is due to

A.technology changes.

B.rent seeking.

C.globalization.

D.productivity differences.

8.If growing income inequality results from changes in technology that, as a whole, make society better off, this will

A.decrease the size of the economic pie because of income inequality.

B.increase the size of the economic pie.

C.not change the size of the economic pie because the positive technology changes will be offset by the increases in income inequality.

D.result incomplete income inequality as technology continues to change in the future.

9.The belief that having more of something makes you happier but in successively smaller increments is called

A.utilitarianism.

B.diminishing marginal utility.

C.the benefits received principle.

D.transcendentalism.

10.The results of a survey conducted by Dan Ariely and Michael Norton found that Americans

A.show absolutely no preference for the amount of equality in wealth distribution in the nation.

B.have a preference for much less equality in wealth distribution than currently exists.

C.have a preference for roughly the amount of equality in wealth distribution that currently exists.

D.have a preference for much greater equality in wealth distribution than currently exists.

11.In the United States, the highest quintile of income earners contribute ________ of all federal tax dollars received, and the lowest quintile of income earners contribute ________ of all federal tax dollars received

A. 24%; 1.5%

B. 20%; 20%

C. 68.8%; 0.4%

D. 29.4%; 11.5%

12.The question "Is the U.S tax system disproportionate enough?" is a ________ question, and the question "How would higher taxes make the rich behave?" is a ________ question.

A. normative; positive

B. positive; normative

C. positive; positive

D. normative; normative

amaranthgoat434

Hello, could you please assist with this discussion question for the Economics course? Thank you.

5) Go to the internet and find an article that discusses the problems of income inequality in the U.S. economy, summarize key points, and post in the Discussions area.

http://neweconomics.org/2014/12/why-inequality-is-an-economic-problem/

Why Inequality Is An Economic Problem

Rising economic inequality was a major driver of the financial crisis. With the OECD recently debunking âtrickle-downâ economics, our new report sets out the links between inequality, the growth in scale and influence of the financial sector, and the dangers for financial stability.

A fragile recovery

A return to growth in economies such as the UK and USA has been welcomed as a sign of recovery from the 2008 financial crisis. But as GDP picks up, so too has the widening gap between rich and poor.

The crisis may be over for the wealthy but the aftermath for ordinary workers depressed wages and growing debt is only getting worse.

Most nations have mustered only negligible growth and this has failed to benefit the vast majority of those nation's populations.

In the seven years following the crash, the UK has suffered the longest sustained decline in real wages since records began.

This decline hasn't has been shared equally across the income spectrum latest annual data up to the end of 2013 shows real earnings for the top 10% increasing by 3.9% and a 2.4% fall for the remaining 90%.

Households are once again piling on risky personal debt at a rate of almost $1billion a year.

Globally, wealth grew by 8.3% last year to $263 trillion, even as living standards stagnate for the majority. Income inequality has seen a sharp return the top 1% of earners have reaped 95% of the USA's economic gains since the crash.

Inequality increases as economies are financialised

Over the past four decades, financial sectors have been extensively deregulated and have expanded enormously as a result, particularly in the UK and USA.

This deregulation produced two systemic outcomes: finance has been freed to become the motor of the economy while the pursuit of greater equality of citizens, as was the focus after the second world war, has been abandoned.

Instead, the notion that unrestrained pursuit of wealth would trickle-down from rich to the poor has been embraced in the mainstream political and economic arenas.

Financial markets, products, and firms now play a much larger role in many areas; from pensions and social insurance to homes and public infrastructure.

Privatization and the doctrine of maximizing value for shareholders have increased the amount of economic activity focused on extracting the largest possible short-term profit. These trends are referred to collectively as âfinancialisationâ.

Until now the connections between this increasing prevalence of financial activities and the steady increase in economic inequality have not been clear. But when these two trends reached a boiling point in the mid-2000s they fuelled a global collapse of financial systems.

The polarization of wealth and incomes fed asset bubbles, risky financial activity,, and necessitated vast levels of household debt â resulting in the 2008 financial crash. With little done since to address these interconnected drivers, the threat of another crisis is very real.

This diagram lays out the seven indicators of economic instability, each fuelled by rising inequality and increasing financial sector activity:

Our report describes how these indicators laid the path for the 2008 crash, and threaten to do the same again:

Increasing inequality depresses demand since consumption levels depend more on the wages of those at the lower end of the income scale than the profits of the wealthy

In the face of stagnating wages, households rely increasingly on debt to maintain their lifestyles with rising asset prices, especially in residential housing, worsening this.

Financial liberalization allows money to flood into countries with trade deficits, such as the USA and the UK, providing the funds for debt-led consumption.

Snowballing wealth at the top increases risky financial speculation.

Inequality doesn't bring growth, it brings economic instability

In recent years there has been a marked slowing of growth across the world's wealthiest economies, with none returning to the growth trends experienced before the crisis. Many have begun to speculate that this stagnation could, in fact, be a permanent development meaning that wealthy economies are fundamentally unable to create enough demand to keep growing.

The mainstream political consensus has for decades now suggested that inequality is a price worth paying for economic growth.

But new research from the Organisation for Economic Co-operation and Development (OECD) shows definitively that this inequality/growth trade-off is false adding to a growing body of research showing that inequality actually prevents economies from growing. This points to a fundamental structural flaw in the economy: if the proceeds of growth are not shared, the pie stops growing.

The pursuit of higher returns for the already wealthy within this dwindling pie cannot persist forever. With wealth refusing year on year to trickle down, debt has been used to plug the wage-consumption gap for the rest.

The signals are showing quite plainly that this pursuit of growth, via inequality, is ineffective and unsustainable.

violetbuffalo377

WRITE a one-sentence summary of each paragraph!

The False Income-Inequality Narrative

BY JASON L. RILEY

Published in the Wall Street Journal on Sept. 29, 2015

An enduring theme of the Democratic presidential race has been income inequality, coupled with an enduring belief that America's affluent reached their status at the expense of the poor and the middle class.

Bernie Sanders speaks of little else on the stump. And when not busy dissembling on her handling of email correspondence at the State Department, Hillary Clinton will tell you that the deck is still stacked in favor of those at the top. If Joe Biden gets in, expect more of the same. The vice president is said to be contemplating a 2016 bid in large part because struggling middle-income families may have trouble relating to Mrs. Clinton on inequality given her high living since leaving the White House.

This theme, in any case, seems to resonate with voters, which is no huge shock in the sixth year of an economic recovery. Envy and resentment fuel class warfare and lackluster economic growth throughout the Obama presidency have made people less optimistic and more inclined to fault others for their circumstances. A Wall Street Journal/NBC News poll this week reports that four-in-five Americans âwere either angry because our political system seems to only be working for the insiders with money and power or anxious and uncertain. After all, the economy still feels rocky and unpredictable or both.

Liberals want to address income disparities through wealth redistribution by taking money from more productive people and giving it to the less productive in the name of fairness as the left defines it. They want to raise income taxes, expand the welfare state, lift minimum wages, and strengthen the bargaining power of unions. Mr. Sanders has been the most explicit about this, even going so far as to propose a wealth tax. Our economic goals have to be redistributing a significant amount of [wealth] back from the top 1%, the senator said in July.

In reality, the left has overstated the problem. And all the focus on divvying up existing wealth instead of creating more risks making matters far worse for the people they are trying to help and the country in general. To the extent that the expanding welfare state allows more people to live without working and therefore without earning income or developing their own human capitalâsupporters of the welfare state are contributing to the very income disparities they so much decry, writes economist Thomas Sowell in his new book, âWealth, Poverty and Politics.

Mr. Sowell is the author of more than 30 books over the past four decades, many having to do with what drives different social and economic outcomes among different groups in the U.S. and elsewhere. In his latest tome, he draws from this well of research to do what he has done so well for so long: question basic assumptions behind public policy and follow the facts where they lead him.

One common assumption is that proportionate or random outcomes are the natural order of things and that gaps or disparities are evidence of something wrong. In fact, huge disparities are the norm, not the exception, because the demographic, cultural, and political factors that influence the development of the human capital that makes people productive also tend to be unequal.

In 2013, only 9% of U.S. women with college degrees who gave birth were unmarried, versus 61% of women who were high-school dropouts and unmarried. Harvard's Robert Putnam reports that children from professional families will hear 19 million more words than their working-class peers before the first day of kindergarten.

These children don't have the same prospects. Equal opportunity, in the sense of being judged and rewarded by the same standards as others, cannot possibly mean equal life chances for children born and raised in these very different settings,writes Mr. Sowell. The fact that life is unfair is not the same as saying that a particular institution, or a particular society, is unfair.

The argument that social mobility is a thing of the past in the U.S. also is disputable. Longitudinal studies by the IRS and others that measure the progress of individuals over time show that the American dream is alive and well. One such paper, published by the Pew Charitable Trusts in 2012, measured whether a person has more or less income, earnings, or wealth than his or her parents did at the same age and concluded that the vast majority of Americans had higher incomes, while 50% had greater wealth.

In other studies, Pew has found generational stagnation but the authors have noted that it didn't apply to immigrants. If low-income immigrants can rise even when the native-born don't, writes Mr. Sowell, that strongly suggests that American society continues to offer opportunities to move up economically, but that not all groups make the same use of these opportunities.

Mr. Riley, a Manhattan Institute senior fellow and Journal contributor is the author of Please Stop Helping Us: How Liberals Make It Harder for Blacks to Succeed (Encounter Books, 2014).

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ECON 104 Lecture Notes - Lecture 10: Lorenz Curve, Progressive Tax, Externality

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